Financial Elements of Financial Elements of Forecasting, Budgeting, Forecasting, Budgeting, and Cash Managementand Cash Management

Presented By:Presented By:

Angela R. DurrettAngela R. Durrett

& Elizabeth Helaire& Elizabeth Helaire

Bankers look at safe-guarding Bankers look at safe-guarding their loans through an analysis of their loans through an analysis of

repayment sources:repayment sources:

Cash FlowCash Flow CollateralCollateral GuarantyGuaranty

Which of these items do you think is theWhich of these items do you think is the

most important repayment source?most important repayment source?

CASH FLOWCASH FLOW

Cash repays loans.Cash repays loans. The way in which a company manages The way in which a company manages

their cash is important to lenders. their cash is important to lenders. Budgeting, forecasting, and cash Budgeting, forecasting, and cash

management techniques can illustrate management techniques can illustrate some level of financial sophistication some level of financial sophistication and concern for cost control and and concern for cost control and monitoring financial trends.monitoring financial trends.

BUDGETINGBUDGETING

Money is a tool that enables you to Money is a tool that enables you to reach your goals in life. Budgeting reach your goals in life. Budgeting shows you exactly where your money shows you exactly where your money goes and provides a spending plan that goes and provides a spending plan that lets you save for the things that are lets you save for the things that are important to your company.important to your company.

However, until you know where your However, until you know where your money goes, you can’t make conscious money goes, you can’t make conscious decisions about HOW to effectively decisions about HOW to effectively budget.budget.

To increase your chances of success, To increase your chances of success, work on your ATTITUDE first!work on your ATTITUDE first!

Many people refuse to budget because Many people refuse to budget because of budgeting’s negative connotation. of budgeting’s negative connotation.

Think of budgeting as a “spending Think of budgeting as a “spending plan” rather than a budget.plan” rather than a budget.

One of the most important One of the most important features of a successful budget features of a successful budget is customization to your needs.is customization to your needs.

Software programs can help you maintain a Software programs can help you maintain a budget.budget.

When researching software programs, keep When researching software programs, keep in mind these items:in mind these items: ComplexityComplexity Ease of useEase of use PricePrice Reporting CapabilitiesReporting Capabilities Variable Analysis / ForecastingVariable Analysis / Forecasting

8 Good Reasons to Budget . . . 8 Good Reasons to Budget . . .

1. 1. Less worry and stress about how you’re going to Less worry and stress about how you’re going to make ends meet.make ends meet.

2.2. Creates extra money to use on things that matter.Creates extra money to use on things that matter. 3. 3. Can keep you out of debt or help you get out of Can keep you out of debt or help you get out of

debt.debt. 4.4. Reveals areas where you are spending too much Reveals areas where you are spending too much

money so you can refocus on your most important money so you can refocus on your most important goals.goals.

5.5. A budget is not only a spending plan, it is a A budget is not only a spending plan, it is a communication tool. The company identifies and communication tool. The company identifies and works towards a common goal.works towards a common goal.

6. 6. Helps prepare for an emergency or large, Helps prepare for an emergency or large, unanticipated expense.unanticipated expense.

7. 7. Lets the company control the money instead of the Lets the company control the money instead of the money controlling the company. money controlling the company.

8.8. Guides the financial direction of the company.Guides the financial direction of the company.

FORECASTINGFORECASTING

Forecasting is the process of Forecasting is the process of estimation in unknown situations.estimation in unknown situations.

The terms “forecast”, “prediction”, The terms “forecast”, “prediction”, “projection”, and “prognosis” are “projection”, and “prognosis” are typically used interchangeably.typically used interchangeably.

Forecasting is concerned with what the Forecasting is concerned with what the future WILL look like, while planning is future WILL look like, while planning is concerned with what it SHOULD look like. concerned with what it SHOULD look like.

One would usually start by planning. The One would usually start by planning. The planning process produces a plan that is, planning process produces a plan that is, along with information about the along with information about the environment - an input to the forecasting environment - an input to the forecasting process. process.

If the organization does not like the forecasts If the organization does not like the forecasts generated by the forecasting process, it can generated by the forecasting process, it can generate other plans until a plan is found that generate other plans until a plan is found that leads to forecasts of acceptable outcomes.leads to forecasts of acceptable outcomes.

RISKRISK

and and

UNCERTAINTYUNCERTAINTY

are central to are central to

forecasting and prediction.forecasting and prediction.

Tips for creating forecasts:Tips for creating forecasts:

Find a forecasting method that is Find a forecasting method that is relevant to your situation, depending relevant to your situation, depending on your situation and company on your situation and company objectives.objectives.

Use up-to-date data for your forecast.Use up-to-date data for your forecast. Use data that spans a long time period Use data that spans a long time period

to reduce the risk of making variations to reduce the risk of making variations in fundamental company trends.in fundamental company trends.

More Tips for creating forecasts:More Tips for creating forecasts:

Avoid judgmental forecasts – they can Avoid judgmental forecasts – they can easily become subject to many biases easily become subject to many biases such as optimism and overconfidence.such as optimism and overconfidence.

Be prepared to overcome criticism by Be prepared to overcome criticism by comparing your forecast to a comparing your forecast to a benchmark or by proving adherence to benchmark or by proving adherence to relevant principles.relevant principles.

Seek assistance in your forecasting Seek assistance in your forecasting efforts.efforts.

Find a forecasting method that is Find a forecasting method that is relevant to your situation, depending relevant to your situation, depending on your situation and company on your situation and company objectives.objectives.

There are numerous forecasting There are numerous forecasting methods available . . . methods available . . .

Time Series MethodsTime Series Methods

These use historical data as the basis These use historical data as the basis of estimating future outcomes.of estimating future outcomes.

(Moving average, exponential (Moving average, exponential smoothing, extrapolation, linear smoothing, extrapolation, linear prediction, trend estimation, growth prediction, trend estimation, growth curve, topics)curve, topics)

Casual / Econometric MethodsCasual / Econometric Methods

These use an assumption that it is These use an assumption that it is possible to identify the underlying possible to identify the underlying factors that might influence the variable factors that might influence the variable that is being forecast. that is being forecast.

(Regression analysis, autoregressive (Regression analysis, autoregressive moving average (ARMA), moving average (ARMA), autoregressive integrated moving autoregressive integrated moving average (ARIMA), Econometrics)average (ARIMA), Econometrics)

Judgmental MethodsJudgmental Methods

These incorporate intuitive judgments, These incorporate intuitive judgments, opinions, and probability estimates.opinions, and probability estimates.

(Composite forecasts, surveys, Delphi (Composite forecasts, surveys, Delphi method, scenario building, technology method, scenario building, technology forecasting, forecast by analogy)forecasting, forecast by analogy)

Other MethodsOther Methods

(Simulation, prediction market, (Simulation, prediction market, probabilistic forecasting and ensemble probabilistic forecasting and ensemble forecasting, reference class forecasting, reference class forecasting)forecasting)

Use up-to-date data for your Use up-to-date data for your forecast.forecast.

Start with the most current company Start with the most current company financial information you have available.financial information you have available.

Then, consider current day information that Then, consider current day information that could impact your forecast. could impact your forecast.

What is going on in my industry?What is going on in my industry? What is going on in the economy? What is going on in the economy? The government? My competition?The government? My competition? Will any of these factors impact my forecast?Will any of these factors impact my forecast?

Use data that spans a long time Use data that spans a long time period to reduce the risk of period to reduce the risk of

making variations in fundamental making variations in fundamental company trends.company trends.

Bankers analyze trend.Bankers analyze trend. TREND ANALYSISTREND ANALYSIS

Avoid judgmental forecasts – Avoid judgmental forecasts – they can easily become subject they can easily become subject

to many biases such as optimism to many biases such as optimism and overconfidence.and overconfidence.

Bankers find it very common for Bankers find it very common for financial forecasts to be inflated. financial forecasts to be inflated.

Inflating your forecasts without Inflating your forecasts without adequate supporting information leads adequate supporting information leads Bank Analysts to believe that you are Bank Analysts to believe that you are either unknowledgeable or unrealistic.either unknowledgeable or unrealistic.

Be prepared to overcome Be prepared to overcome criticism by comparing your criticism by comparing your

forecast to a benchmark or by forecast to a benchmark or by proving adherence to relevant proving adherence to relevant

principles.principles. State and discuss the ASSUMPTIONS State and discuss the ASSUMPTIONS

used in your forecast. used in your forecast. My personal forecasting tip: Be My personal forecasting tip: Be

reasonable, factual, and logical.reasonable, factual, and logical. ““Sell” your assumption and earn the Sell” your assumption and earn the

“buy-in”.“buy-in”.

Seek assistance in your Seek assistance in your forecasting efforts.forecasting efforts.

Your BankerYour Banker Reference BooksReference Books Major Business SchoolsMajor Business Schools

CASH MANAGEMENTCASH MANAGEMENT

Cash Management, or Treasury Cash Management, or Treasury Management, services can be costly, Management, services can be costly, but usually the cost to a company is but usually the cost to a company is outweighed by the benefits: cost outweighed by the benefits: cost savings, accuracy, efficiencies, etc.savings, accuracy, efficiencies, etc.

Sample types of services Sample types of services available:available:

Account Reconcilement ServicesAccount Reconcilement Services Advanced Web ServicesAdvanced Web Services Armored Car ServicesArmored Car Services Automated Clearing House (ACH)Automated Clearing House (ACH) Balance Reporting ServicesBalance Reporting Services Cash Concentration ServicesCash Concentration Services LockboxLockbox Positive PayPositive Pay Sweep AccountsSweep Accounts Zero Balance AccountingZero Balance Accounting Wire TransferWire Transfer Controlled DisbursementControlled Disbursement

Potential Pitfalls of Inadequate Potential Pitfalls of Inadequate Forecasting, Budgeting and Forecasting, Budgeting and Proper Cash ManagementProper Cash Management

Drop in cash balances and Drop in cash balances and overdraftsoverdrafts

Due to not considering the Due to not considering the cyclicality/seasonality of revenues, cyclicality/seasonality of revenues, cash receipts and cash cash receipts and cash disbursementsdisbursements

Accounts payable increaseAccounts payable increase

Due to lack of cash, possibly due to Due to lack of cash, possibly due to inaccurate forecasting and inaccurate forecasting and budgeting, this leads to paying trade budgeting, this leads to paying trade credits slower and holding payments credits slower and holding payments until you collect on receivables or until you collect on receivables or other trade debtother trade debt

Deferred maintenance/Cut Deferred maintenance/Cut capital expenditurescapital expenditures

This will further hurt your company by This will further hurt your company by reducing the value of equipment reducing the value of equipment (collateral), decreasing operating (collateral), decreasing operating efficiency; thus, costing more in the efficiency; thus, costing more in the long runlong run

Elimination of fringe benefitsElimination of fringe benefits

This is done in an attempt to cushion This is done in an attempt to cushion the bottom line, but it puts increased the bottom line, but it puts increased pressure on employees (i.e. stress, pressure on employees (i.e. stress, lower employee morale, deteriorating lower employee morale, deteriorating product/service)product/service)

Non – Seasonal borrowingNon – Seasonal borrowing

LayoffsLayoffs

This is done in an attempt to reduce This is done in an attempt to reduce expenses by only keeping “essential” expenses by only keeping “essential” employees, but this will lower employees, but this will lower productivity, efficiency, service and productivity, efficiency, service and moralemorale

Sale of AssetsSale of Assets

This is done in an attempt to generate This is done in an attempt to generate cash, but because maintenance has cash, but because maintenance has been deferred, the assets may not been deferred, the assets may not generate the revenues expected if generate the revenues expected if regular maintenance had been regular maintenance had been continuedcontinued

Manager/Owner receives late Manager/Owner receives late financial statementsfinancial statements

This is usually done in an effort to hide This is usually done in an effort to hide information, adjust numbers or correct information, adjust numbers or correct mistakes made in the past.mistakes made in the past.

Inventory and/or A/R Assets get Inventory and/or A/R Assets get out of controlout of control

Without proper forecasting and Without proper forecasting and budgeting, these assets could increase budgeting, these assets could increase sharply before anyone is able to sharply before anyone is able to recognize there is a problemrecognize there is a problem

Tips to Avoid Such PitfallsTips to Avoid Such Pitfalls

Tip #1Tip #1

When creating your budget, forecast When creating your budget, forecast and cash management procedures, be and cash management procedures, be sure to set your own financial reporting sure to set your own financial reporting guidelines, Working Capital guidelines, Working Capital requirements, Income and Cash Flow requirements, Income and Cash Flow requirements, Tangible Net Worth requirements, Tangible Net Worth requirements, etc.requirements, etc.

Tip #2Tip #2

Reexamine your projections versus Reexamine your projections versus what actually happened, in order to see what actually happened, in order to see how well your forecast lined up, or how well your forecast lined up, or where you need to make adjustments.where you need to make adjustments.

Tip #3Tip #3Build a relationship with your Banker!Build a relationship with your Banker!

Your Banker can help you begin to see the Your Banker can help you begin to see the problems described that are occurring, and can problems described that are occurring, and can help you devise a plan to work through themhelp you devise a plan to work through them

Your Banker will be able to help you set financial Your Banker will be able to help you set financial reporting guidelines, Working Capital reporting guidelines, Working Capital requirements, Income and Cash Flow requirements, Income and Cash Flow requirements, Tangible New Worth requirements, requirements, Tangible New Worth requirements, etc. that you can use internallyetc. that you can use internally

Your Banker will be able to refer you to parties Your Banker will be able to refer you to parties who can help with your financial budgeting, who can help with your financial budgeting, forecasting and cash management, as well as forecasting and cash management, as well as other business needs (i.e. Accountants, Lawyers, other business needs (i.e. Accountants, Lawyers, Contractors, etc.)Contractors, etc.)

In conclusion . . . In conclusion . . .

To break it down once more, don’t let To break it down once more, don’t let budgeting, forecasting, and cash budgeting, forecasting, and cash management intimidate you.management intimidate you.

There are a tremendous amount of There are a tremendous amount of resources at your disposal.resources at your disposal.

Above all . . . be reasonable, factual, Above all . . . be reasonable, factual, and logical!and logical!